CSX Enters The Hunter Harrison Era

CSX Corporation CSX announced the appointment of Hunter Harrison as its CEO effective immediately, with a four-year contract. The speedy entry of Hunter Harrison “should be a significant positive for shares over the course of this year and next,” Deutsche Bank’s Amit Mehrotra said in a report.

Mehrotra maintains a Buy rating on CSX, while raising the price target from $56 to $60.

Optimism Around New Management

The company also announced the appointment of Paul Hilal, CEO of Mantle Ridge, as vice chairman. Mantle Ridge would now have ~40 percent of the total board seats, or five appointees (including Hilal and Harrison) in the total of 13 seats.

The entry of Harrison into CSX should boost the company’s shares through 2017 and 2018, despite the recent outperformance, Mehrotra mentioned. He believes the new management would target 58 percent operating ratio and 15 percent capital expenditure as a percentage of sales within three years.

This implies an EPS of $3.80 by 2020, representing an EPS compounded annual growth rate of 25 percent for 2017–2020. Free cash flows after dividends could almost triple in this period, the analyst added.

“These numbers would translate to a 2017 year-end share price of $60…We could see significant upside to this target under more favorable EPS and EBITDA valuation scenarios, which are demonstrable if new mgmt. executes to plan,” Mehrotra wrote.

Related Link: Deutsche Bank Upgrades CSX To Buy; Says 'In Hunter We Trust'